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N° 2003-22 |
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| December 2003 |
| A New Look at the Feldstein-Horioka Puzzle
using an Integrated Panel |
Anindya Banerjee
Paolo Zanghieri |
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| We use a panel of 14 European
countries to take a fresh look at the so-called Feldstein-Horioka puzzle on the
high correlations between savings and investment observed within countries. A
large literature has emerged to investigate this issue, using both individual
country-by-country data and panels constructed by pooling data from several countries
although the answers remain by and large elusive. Since we argue that the savings
and investment series in our panel are integrated of order one, we use the recently
developed theory of panel unit roots and cointegration to look at the relationship
between savings and investment. Our particular contributions are (a) to consider
the puzzle comprehensively, using both time series and panel methods for integrated
series; (b) to consider subsets of countries in the panel; and (c) to apply tests
of the hypothesis to various disaggregates and transformations of the core datasets,
with our particular interest centering on the implications for fiscal policy.
We also interpret the findings of our tests in the light of the likely presence
of cross-country cointegration (which is known to affect the properties of the
tests for unit roots and cointegration. |
Abstract |
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| Saving; investment; capital mobility; panel
cointegration |
Keywords |
| C31; C33; F32; F41 |
JEL classification |
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